Shedding Light on a Shadow Industry

Graphic Designed by: Jenny Chen

BRB Bottomline: All industries from retailing to financing rely on consumer data to conduct their businesses. Consumer data is so crucial that companies known as data brokers have revolved their business model around primarily obtaining and selling virtual consumer data points to other companies. Large corporations have never questioned where all this data comes from, and consumers are left out of the loop entirely. These data brokerage companies have been operating in the shadows for years. But it’s time they come into the light.

Data is the new currency in every modern sector. Companies will continue to use consumer data and data analytics for marketing, gauging advertising effectiveness, tracking spending patterns, etc. This is where data brokerage companies enter the picture. A report by the Federal Trade Commission in 2014 defined data brokers as “companies that collect consumers’ personal information and resell or share that information with others.” Essentially, these data companies aggregate data on you through a variety of sources (more on this in the report) from which they can eventually sell “you” to marketers.

For decades, the data brokerage industry often eludes the everyday consumer because they operate with little to no federal oversight. As of a couple years ago, there are almost no regulations regarding the business practices of these brokers, allowing these companies to collect data about you from any possible source – government records, transaction records, credit ratings, or online activity – without ever disclosing their methods of collection. For years, companies in the industry have made billions in revenue selling virtual data points, and no consumer ever hears a peep.

But no longer…

The Facebook Cambridge Analytica Scandal

Ahh, the first domino that fell.

Facebook suffered a major data scandal last year. Click here for the full story. In short, a third-party data firm, Cambridge Analytica, obtained sensitive and personal information of millions of Facebook users through a personality test. Facebook, after suffering a major PR hit, was quick to point the finger to third-party brokers like Acxiom and Experian by discontinuing their Partners Program, which originally allowed third-party access to user data for marketing purposes.

The incident had immediate impact on advertisers and especially third-party brokers. Acxiom Corporation, a data broker, saw its stock price plunge 34% percent the day Facebook announced the discontinuation.

But that’s not the story; it’s only the start of an entirely different story. The scandal stimulated a conversation between corporations and consumers regarding how personal data is used. And caught smack in the middle of this conversation are third-party data brokers. Instead of leaching money off of consumers and their personal information, data brokers and ad tech companies are now uncomfortably face-to-face with the consumers in an unfamiliar conversation about data transparency.

Bringing Down the Hammer on Data Transparency

The Facebook scandal started the tug-of-war between data brokers and consumers. And what’s worse for these companies is that government agencies are on the side of the everyday consumer, bringing down the hammer on data brokers. The EU started enforcing the General Data Protection Regulation (GDPR) in late May of last year. The regulation – which is said to be the most influential one regarding data regulation in decades – forces companies to disclose their methods of data collection and obtain consumer consent when collecting data or face a hefty fine.

Apple’s CEO, Tim Cook, advocates for a regulation in the US that is similar to that of the EU to crack down on consumer data privacy. There are already bills passed in California and Vermont regarding these issues. Although there is no federal regulation in the US as of yet, there are bills in circulation that could lead to concrete legislation in this year or the next.

These governmental regulations do impact large data corporations. Oracle acknowledged them as a risk to its operations in their financial reports:

“In addition, U.S. and foreign governments have enacted or are considering enacting legislation or regulations, or may in the near future interpret existing legislation or regulations, in a manner that could significantly impact our ability, as well as the ability of our customers, partners and data providers, to collect, augment, analyze, use, transfer and share personal and other information that is integral to certain services we provide.”

For the most part, large brokerage companies like Oracle and Acxiom should be able to navigate the changes despite some reduction to their bottom line. But the biggest impact of these bills is on smaller data businesses. These data brokerage and ad tech companies rely heavily on staying anonymous and obtaining consumer data for marginal prices from undisclosed – and potentially unethical – sources. And in an industry where consumers now call for transparency, these companies are being driven out of the market. Small ad-tech companies who rely heavily on cheap consumer data like Klout, Drawbridge, and Verve shut down their Europe businesses because they don’t have the resources to absorb the extra costs associated with data collection and disclosure in this new era of data regulation.

What Does This Mean for You?

So why does all this matter for the average consumer? Why does it matter that all these smaller data brokerage companies are being squeezed dry by governmental regulations? To understand this, let’s look at the data analytics start-up Predictim.

Predictim is a software start-up based in Berkeley, California, who offers an AI babysitter scanning service. Basically, parents can pay Predictim $24.99 to run a risk assessment on potential babysitters across social media platforms to give a risk score. Parents can then make an informed decision based on this score.

Although Predictim does ask babysitters for consent to review their social media activity, Predictim ultimately isn’t transparent in disclosing that the company is actually making inferences about their personality, not just reviewing their online presence. And the result of the scan is never revealed to the babysitter; so they never know that the reason they never got the job was because they had a low score for bullying risk due to a song lyric they tweeted at the age of 16. For people that rely solely on babysitting as their source of income, this lack of transparency in data usage could ruin careers.

This story made it to the front page of the Washington Post, and large corporations like Facebook and Twitter are banning Predictim from accessing their data. But Predictim is just one of many cases of this. Small companies that collect consumer data aren’t transparent in their practices. Consumers just want to know which data is being taken, and what results are being drawn so they aren’t blindsided when this data is used against them. This is where regulations come into play. These small data companies are forced to incur higher costs to be transparent, and most of them are driven out because they can’t comply, leaving behind a more oligarchic market with large – and more ethical – data corporations as the sole players.

Take Home Points

Because of how easy it was to anonymously obtain consumer data, there were many players in the data brokerage industry. But the transparency conversation has illuminated a shadow industry; now consumers are backed by the power of government regulations and large corporations, gaining more control over their personal data and driving out these smaller players.

It seems that consumers are winning the transparency tug-of-war against data brokers. It’s ironic that this movement for consumer data transparency started with Facebook mishandling consumer information. Government regulations such as the GDPR and US legislations (state and federal) in the works will force data corporations to be more transparent about their practices, and this only benefits the everyday consumer.


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